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Ramaco Resources, Inc. Common Stock (NASDAQ:METC)
Q2 2019 Earnings Call
Aug 14, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to the Ramaco Resources second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Jeremy Sussman, chief financial officer. Mr.

Sussman, you may begin.

Jeremy Sussman -- Chief Financial Officer

Thank you, operator. On behalf of Ramaco Resources, I'd like to welcome you all to our second-quarter 2019 earnings conference call. With me this morning is Randy Atkins, our executive chairman, Mike Bauersachs, our president and CEO; and Chris Blanchard, chief operating officer. Before we start, I'd like to share our normal cautionary statements.

Certain statements discussed on today's call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent Ramaco's expectations or beliefs concerning future events, and it is possible that the results discussed will not be achieved. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of Ramaco's control, which could cause actual results to differ materially from the results discussed in the forward-looking statements. Any forward-looking statement speaks only as of the date which it is made, and except as required by law, Ramaco does not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

New factors emerge from time to time, and it is not possible for Ramaco to predict all such factors. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements found in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K. These risk factors and other factors noted in the company's SEC filings could cause its actual results to differ materially from those contained in any forward-looking statement. Now lastly, I'd encourage everyone on this call to go to our website, ramacoresources.com, and download today's investor presentation under the events calendar.

Now with that said, let me introduce our Executive Chairman Randy Atkins.

Randy Atkins -- Executive Chairman

Thank you, Jeremy. As always, I want to thank everyone for joining us today to discuss our second-quarter results. There is an old Chinese curse which goes, your shall be a light lived in interesting times. I think the events in the last few weeks in both the financial and coal markets certainly bear this out.

But despite turbulence, we are happy to discuss today that we have printed our most financially successful quarter since we got started. After my comments, Mike and then Chris will make some remarks on both recent operations, and the sales and marketing landscape. Jeremy will then provide more detailed comments on our financial results, as well as, his macro perspectives on the market. For those who have gotten used to tolerating my one liners, last week, I remarked at investor conference that you really don't know who's wearing a bathing suit until the tide goes out.

This summer, we have seen a riptide with some unusual and severe stress in certainly the coal space. It feels like not a week goes by that we don't see another coal company here filing for bankruptcy, auctioning assets, reorganizing or announcing a senior resignation or management change. The thermal coal market has pretty much dropped off the shelf. Even Medco benchmark prices, which have held pretty steady at reasonably strong levels over the past year, have now dropped by over 30%.

If you're in the coal business, these are the times that try you. But as turbulent as the market looks right now, I want to point out that Ramaco was born as a contrary investment play in the depths of the last coal route earlier this decade. We took some care at the outset to design this company to be very conservative in terms of both leverage and AR liabilities so we could financially withstand the historic volatility in the met space. I believe we have largely succeeded.

We have basically the lowest debt and legacy liabilities in the industry. We were also successful in choosing reserves which were geobiologically advantaged. And as a result, we have some of the lowest cash mining cost in the industry. As we look at where the markets now sit, we are extremely comfortable that we are in a strong position to overcome these headwinds, demonstrate some resiliency, and emerge in very good shape.

An extra benefit to us is that our customers also realize all that. We've heard from both our domestic and international customers that they are attracted to not only our coal qualities, but the security of supply from a financially stable and growing counterparty. As we set sail shortly on the marketing discussions with our 2020 domestic customers, it is gratifying to be in that position. On our last earnings call, I stated that we were on track for our second quarter to be the highest adjusted EBITDA on record for the company.

I am delighted to report that I actually got that one right. We achieved over $90 million for the quarter and almost $33 million in adjusted EBITDA for the first six months of '19, which is a 36% bump from last year. We look forward to continued strong results for the balance of '19. I might add that we sold more than 940,000 tons of company produced coal in the first half, and a close to completely sold out in priced through year-end at an average of roughly $115 per ton.

As Mike is going to discuss, we completed the silo rehab this past month at Elk Creek and are back to full processing capacity. Despite the lingering effects of the silo incident in the second quarter, we have been able to hold Elk Creek mines cost in the mid-60s, and are still leaving our overall 2018 Elk cost guidance of between $63 to $67 per ton. Chris will discuss some further details on costs. And although Jeremy is going to provide a riptide of financials, some selective metrics for Q2 are as follows: This price realizations of $116 per ton in cash margins, up $45 per ton on company produced coal.

This improved by 23% from Q1; capex for the quarter grew from $8 million in Q1 to almost $12 million this quarter. We are on track for a 2019 overall capex spend still in the $35 million to $40 million range likely coming in toward the upper end. This estimate, I might point out, also includes the capitalization of our losses with the Berwind complex as we continue its development until hit the Pocahontas four seam by summer next year. Building from this strong start, we look ahead to the balance of 2019, and are predicting that the second half will look very similar to the first half in terms of both production and earnings.

For production at Elk Creek, we continue to estimate roughly 1.8 plus million tons. At Berwind, we expect about 250 million -- 250,000 tons from the Pocahontas three seam continuing through mid-2020. On sales and marketing, we continue to guide that we will sell roughly 2.2 million tons for 2019. Since we are in the middle of the annual North American sales negotiations for 2020, we basically did not discuss either forward pricing or volumes on this call.

I can say that we are now engaged with every major domestic steel company and in most cases, are an incumbent supplier. As I mentioned on our last call, we are continuing to explore various ways to increase our overall sales profile in some of the export markets, which Mike will address. At our Elk Creek complex, now that we are back to some degree of normalcy, we are looking to expand the capacity of the prep plant by roughly 500,000 to 600,000 tons of clean coal per year, above the nameplate throughput capacity. This would take our Elk overall production targets to 2.5 million to 2.6 million tons.

Assuming that we greenlight this project, our next board meeting in late September, we would initiate a portion of our roughly $8 million of total new capex for this project in late Q3, Q4 of calendar '19 with the balance being spent next year. The project we anticipate will take 10 to 12 months to complete once we initiate. We also discussed on our last call, adding some new high-vol A production at our Knox Creek complex in what we call the Tiller-Jawbone mine. This would ultimately add 500,000 tons of production in the Jawbone high-vol eight seam at full capacity.

Given its current turbulent in the market, we are considering to defer moving forward on deploying the capex for a full opening of that new mine until we see some clear direction in the overall market. We continue, however, to be active in pursuing various additional accretive add-on or bolt-on opportunities around all of our mine complexes. We hope to be in a position to offer clear guidance on a number of these projects as the year progresses. As Berwind ramps up and Elk Creek continues as expected to produce, we are currently guiding to roughly a 2.3 million companywide annual production rate in 2020.

I'd note that this number does not include any of the potential expansion projects we just discussed. We continue to guide that by 2022 to '23, we will have production in the 4 million to 4.5 million-ton range. In summary, although we see some choppiness in the near term both financial and coal markets, we feel the intermediate outlook is still good. We have just experienced our best quarter, and are essentially sold out through the balance of 2019 at very attractive prices.

We expect this will produce a record year on earnings for us as the balance of the year plays out. As for our stock price, we have designed our operations to take advantage of strengthening the market in good times, and to weather the storm and be resilient in turbulent times. We continued to operate on the theory that ultimately our cash flow generation will speak for itself, and we're confident that the stock market will ultimately reflect that value over time. However, it is certainly not reflecting it today for us or frankly, any other coal name.

I would note that at current levels, we are trading in a roughly at 2 times EBIT-to-EBITDA ratio on 2020 consensus numbers. Considering our strong fundamentals, I think I am safe to say that we are perhaps the most undervalued name in our peer group. So if anyone likes a bargain, I would suggest another look. So with that, I would like to turn the floor over to Mike to talk about some operations.

Mike Bauersachs -- President and Chief Executive Officer

Thank you, Randy. Our overall results were very good and are indicative of a clean quarter from an operational standpoint. Mining and shipping occurred without any noteworthy incidents. Our infrastructure modifications undertaken due to the silo collapse have been completed.

The two remaining silos have been modified and became fully operational in August. Their use has decreased our preparation plant downtime, and should enable us to work through the last remaining impact from the silo collapse high-vol coal inventories. We also have a permanent silo bypass in place. This provides redundancy, but also allows us to feed coal to the plant that might have a tendency not to flow well through the silos.

We anticipate consistent performance from our Elk Creek mines for the remainder of 2019. Each mine is currently operating in good mining conditions. In the case of the Alma mine, we have taken delivery of mobile route supports and we'll be conducting secondary mining for the remainder of the year. The biggest impact on production in the third and fourth quarters will likely relate to the multiple vacation days in which the mines will be idle.

Development mining at our Berwind mine is continuing without any adverse geologic conditions. The second section is now fully functional and production is increasing. It is mining mostly in seam versus cutting additional height in our development section. Our view of Appalachian production is the depletion and lack of capital will create production voids going forward.

Thus, we continue to look for smart capital deployment. As Randy mentioned, our current shortlist includes potentially adding processing capacity at the Elk Creek preparation plant, and ultimately developing a mine and a high-volatile A Jawbone seam at our Knox Creek complex. Both of these projects have compelling rates of return. In all cases, as Randy noted in his remarks, these investments will only occur when both market conditions warrant and an appropriate amount of liquidity is available.

Fortunately, our low per unit costs and good balance sheet affords us opportunities that others can't pursue. In any event, we plan to take up these investment options at our upcoming board meeting in September. At this point, it is too early to comment on what project or projects will receive a greenlight to proceed. We are winning seeing some unprecedented occurrences in the coal industry.

We currently have three of our direct and closest competitors in the metallurgical sector in bankruptcy or reorganization. Many of their operating assets are available for sale. But to date, we have not found assets that were compelling enough to pursue. In our view, some of their mines lack the capital to continue to operate.

Our company infrastructure, in many cases, is equally challenged. During the last two years, we have had a stable metallurgical coal pricing environment. It is hard to envision that many of the assets now in bankruptcy will be able to operate in a less attractive marketplace, let alone secure sufficient capital to upgrade the mines and rebuild equipment. We opportunistically acquire geologically advantaged metallurgical coal assets, spent the capital to develop them properly, and continue to deploy capital to keep them productive.

We paid our dues and have been able to enter into a traditional bank deal with a strong regional bank. We bought assets and avoided the assumption of long-term liabilities, which continue to weigh heavily on most of our competitors. From a marketing standpoint, we are pleased with our current position. We have a domestic book of business with 80% or approximately 1.7 million tons committed to the North American markets.

This business includes almost all domestic coke buyers. We remain confident in our ability to market our coal and retain a large portion of our position in customer wins as we enter domestic negotiations for 2020. While exports are currently a small part of our current business, we still intend to grow that business. Depending on how pricing develops with North American customers, our outsize domestic business could be modified downward in favor of more exports.

Our new Head of Marketing Kevin Karazsia, has recently physically circled the world, meeting with a large number of potential new export customers. Our pursuit of new international business should result in an increasing number of test cargoes over the next six months. While international customers have welcomed the recent pullback in coal prices, their biggest concern seems to be the cost of iron ore, as well as, the underlying health at the economists where they directly or indirectly ship their product. Our take on the marketplace as a whole is that the recent fall in international indexes is primarily related to the pullback in demand, especially in Europe and in short term, uncertainties regarding Chinese port restrictions as opposed to oversupply.

Alongside that news, India continues to grow. We just saw an announcement from Topaz steel relative to plans to increase steel production capacity from 18.5 million tons to 30 million tons by 2025. The intermediate fundamentals look solid for strengthening demand. While we see a slightly lower but still profitable metallurgical market, the steam market is in very poor shape.

In most cases, from a spot perspective, it is now virtually nonexistent. Many of our major direct competitors have substantial exposure to the steam markets. While we have sold some steam coal, it has been far less of our sales mix that even we anticipated going into 2019 at just 4% or less of our overall mix. For clarification, all of our limited steam coal production is generated by our surface mine at Elk Creek.

Overall, from a business development perspective, we remain focused on acquiring synergistic infrastructure and reserves versus acquiring another company's operating assets. Most of our current activity is focused on leasing coal. We continue to have a bias for developing mines. We're also focused on cost savings investments, most of the current opportunities to deploy capital or internal projects that meet our investment criteria and high operational standards.

One of the benefits of the last robust market might be that some assets can become available at lower upfront costs. In summary, coal production increases within the metallurgical coal industry have not materialized. It's evidenced that there are still a number of weak producers and undercapitalized mines that may be unable to sustain current production levels, let alone grow them. If production can't be grown or maintained in what has been a very good market, we believe it to be more likely than not that production will be reduced by marginal players in a moderating market.

We continue to believe that our business strategy is not only viable, it's been proven to be insightful, especially in light of recent bankruptcies. We look forward to advancing these efforts in the second half of the year. I would now like to turn things over to Chris Blanchard, who will provide some operating highlights relative to our second quarter.

Chris Blanchard -- Chief Operating Officer

Thank you, Mike. As Mike and Randy have both mentioned, second-quarter operations were largely in line with our previous expectations and guidance. We are also pleased with continued strong performance from operations in both employee safety and in environmental and regulatory compliance. Having one of the strongest workforces, nearly 400 miners now in Southern West Virginia, and Southwest Virginia certainly helps.

I would like to point out a couple of operational highlights from the quarter and looking ahead for the second half of 2019. Turning first to our Elk Creek complex. At our Eagle mine, we completed mining in a challenging geologic area during May and the first half of June. We had anticipated these conditions in advance.

But as a result of actually mining through them, overall productivity for these mines was reduced by 10% as measured by feet per shift for the second quarter compared to the first quarter. This resulted in production of over 20,000 clean tons West quarter over quarter. These conditions and the lower production also led to a higher cost of just over $7 per clean ton produced from this mine for the quarter. Mining was completed in this area at Eagle and productivities have returned to first-quarter levels by the end of June.

This has also continued into the third quarter. Through the acquisition of an adjacent lease, we have extended our projected full-seam mining area for an additional 12 months. We expect mine rates and mining costs at our Eagle mine to return to first-quarter levels for the balance of 2019. As Mike mentioned, at our Alma mine, we have completed advanced mining on one of our sections and have begun to retreat mine.

We have approximately 14,000 feet of panels to be retreated. And we expect that given the mining conditions, this should last throughout the remainder of 2019, and into 2020 before we return to advanced mining. The secondary recovery will be fully mechanized, and we expect productivity to remain relatively steady during the period with the reduction in mine cost throughout. We expect cash costs at Alma to decline $2 to $3 per clean ton for the remainder of 2019 based upon the reduction in root bolt-on costs and reduced maintenance costs on equipment during pillaring activities.

The Elk Creek highwall miner operation will complete construction of a high-voltage line power project in the third quarter. This will enable the highwall miner to operate on the existing Elk Creek power system instead of relying on diesel generators for electricity. This should further reduce one of our lowest unit cost operations by another $2 per ton going forward. At the Elk Creek plant, as Mike mentioned, both remaining silos are now back online.

Our permanent bypass system remains in place, allowing redundancy, as well as, the ability to perform required maintenance on either system without having to also idle preparation plant itself. Ultimately, the higher utilization rates that we will realize will help us to reduce our raw coal stockpile and lower our unit washing cost. We have also now broken ground for the expansion of our existing plate press facilities at the Elk Creek plant. This will give our current operations more flexibility when disposing of the ultrafine rock generated from the preparation plant, as well as, provide us with the additional capacity required should we undertake the full preparation plant upgrade that's currently under consideration.

Switching to our development project at the Berwind mine. The mine plan is still progressing as we work our way toward the Pocahontas four seam. We anticipate completing mining to the float bottom on or before year-end, and are budgeting roughly eight months for slope development with production in the Pocahontas four seam to begin immediately thereafter in mid-year 2020. With the program of horizontal drilling that we've already completed, coupled with the vertical core holes that we drilled from the surface, we are as certain as the coal industry can get that there are no further anomalies in front of us, and remain confident of our ability to reach the Pocahontas four seam with substantially thicker coal averaging 55 inches.

I would now like to turn the floor over to Jeremy to provide a more detailed comment on our financial results, as well as, provide some macro perspectives on the market.

Jeremy Sussman -- Chief Financial Officer

Thank you, Chris. In terms of second-quarter financial highlights, Randy hit a number of the key points, but I want to dig into the details a bit more. Second-quarter 2019 EBITDA of $19.1 million was the best in company history, 28% above the previous high of $14.9 million in the second quarter of 2018. Second-quarter 2019 revenue of $65.8 million was also a quarterly record, and compared favorably to revenue of $65.3 million in the same period one year ago.

Record revenue came on the back on the best quarter of realized pricing in the company's history. Specifically, price per ton on company produced coal was $116 in Q2, which compared to $91 in Q2 of 2018. Q2 2019 net income was $10.6 million, which compared to $10.2 million in Q2 of 2018. Second-quarter 2019 earnings per share of $0.26 was another quarterly record in compared to earnings per share of $0.25 one year ago.

I'd point out that while the company's effective tax rate was 17% in both the first quarter and second quarter of 2019, actual cash taxes payable for all of 2019 are expected to be less than $200,000. Moving to capital expenditures. Second-quarter 2019 capex was $11.5 million, which compared favorably to second-quarter 2018 capex of $14.7 million. We are on track for 2019 overall capex spend in the $35 million to $40 million range likely coming in toward the upper end, which includes capitalized losses for the remainder of the year at our Berwind and Knox complex.

As noted in our earnings release, we are reiterating all key production sales and cost guidance for 2019. Specifically, we expect company production of 1.8 million to 2.2 million tons this year with roughly 1.6 million to 1.9 million of that coming from our flagship Elk Creek complex. We continue to expect to sell between 2.0 million and 2.4 million tons of overall coal this year with 96% of those things being metallurgical coal. Furthermore, we continue to expect the cash cost per ton at Elk Creek of $63 to $67 this year.

First half cost per ton sold of $65 at Elk Creek put us nicely in that range. Now as Randy noted in his prepared remarks, Ramaco was built to withstand market turbulence. I'd like to expand upon of this a bit. We believe there are a number of distinct areas that set Ramaco apart from its peers, and I will go through five of them now.

No.1, cash costs. Simply put, you cannot fake geology. We have among the highest clean ton per foot metrics in the industry. As a result, we believe our cash cost is $65 per ton at Elk Creek in the first half of 2019 make us the lowest cost met coal producer among our publicly traded peer group.

No.2, balance sheet flexibility. As we show on Slide 11, our debt-to-EBITDA matrix are among the best in the industry. Based on first half 2019 results, our debt-to-EBITDA ratio was just 0.2 times. I'd remind everyone that as of June 30th, our net debt stands at under $10 million.

Given our lack of meaningful interest expense, cash taxes, and other below the line cash items, when stress testing how Ramaco may or may not hold up in a downturn, EBITDA minus maintenance capex should get you almost all the way there. With our maintenance capex coming in around $6 to $7 a ton or so, we are confident that we're built to withstand a prolonged downturn should one arise. No.3, liabilities. At just $13 million, Ramaco's legacy liabilities are 98% below our direct peer group average and by far the lowest cost among this group.

This is one of the major advantages to building Ramaco the way we built it, i.e., the right way, developing geologically advantaged greenfield mines. No.4, management ownership. As we show on Slide 10, our management team currently owns about 12% of the company. None of our peers are materially above 1%.

Simply put, we are aligned with our shareholders. No.5, lack of thermal coal. As I noted earlier, just 4% of our coal this year is expected to be sold into the thermal coal markets. Among our direct peers, we are just one of two publicly traded companies that produce at least 95% of our tons as met coal.

And of those two, we are the only one which is a large domestic met coal supplier. I'd now like to turn to some of our current and forward views on the macro environment. As Randy noted, metallurgical coal spot prices have fallen roughly 30% year to date with prices hovering just below the $160 per ton mark. However, despite the fall in spot prices, the forward curve is trading at similar levels to one year ago.

Specifically, as we show in Slides 13, this time last year, the 2021 curve was at $161 per ton. It is currently at $160 per ton i.e., down exactly $1 a ton year over year. Furthermore, the forward curve is in a modest contango state. Global capex in the met coal space remains historically low.

We estimate that met coal capex as a whole was 70% below peak level last year as the high cost of capital from many producers and ESG pressures continue. With three large U.S. met coal bankruptcies occurring in the last couple of months, we expect further high cost supply to get rationalized. Now turning to the demand side.

Chinese steel production rose 10% in the first half of 2019. While U.S. hot-rolled coal prices are down about 30% year over year. We are encouraged by the fact that they are up roughly 15% off of their recent lows after three domestic price hikes have been announced by the steelmakers.

We also note that U.S. steel capacity -- utilization has averaged about 80% for the last 12 months for the first time since the the 2007, 2008 timeframe. Lastly, we think a large part of the met coal spot price declined this year has been driven by the uncertainty of Chinese import restrictions. As a result, as shown on Slide 16, the art of international met coal in China is now the second highest it has been at any point over the past four years at over $30 per ton.

If history is a guide, we look for that gap to shrink once there is a bit more certainty in the market, which could have a positive impact in overall met pricing. Now before I turn it over to questions, I'd remind investors that at its core, Ramaco is a low-cost producer with very little debt or legacy liabilities. And as Randy noted, we have designed our operations to be resilient in turbulent times, and of course, take advantage of strong markets in good times. This now concludes management's prepared remarks.

At this time, I'd like to open up the line for any questions you may have on our second-quarter 2019 results or outlook. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Mark Levin with Seaport Global. Your line is now open.

Mark Levin -- Seaport Global Securities -- Analyst

Great. Thanks and congratulations on a terrific quarter. Some of the best in company history so congratulations to all of you. My question relates more around contracting strategy in 2020.

Obviously, not looking for guidance and I realize you guys are right in the middle of negotiations. But clearly, most of the tons or the overwhelming majority of your tons were placed into the domestic market in 2019. Maybe you can frame for us what you -- how you're approaching 2020 a year ago, HRC prices were on a bit of different spot, and I think met coal prices were as well. Would you -- should we expect the mix of export versus domestic to change materially in '20 versus '19?

Chris Blanchard -- Chief Operating Officer

Yeah. Mark, I'll go ahead and address that. It really is too early to tell exactly what our mix will be up. The good thing is we're working from just a huge, solid domestic position.

We have the ability to back down. And of course, our future growth prospects really are focused on the international markets. So we're going to be prepared to shift depending on what happens with our pricing negotiations. I suspect that you would probably not see us dip below 60% domestic, but we're prepared to at least go to that point.

The good thing is, I mean, we look at -- when we look at the competition, when we look at their cost, and we look at our cost, and we look at a little bit of weakness, we know that some of the highest quality coals are in some of the coal mines that aren't necessarily in the best of shape. So we still believe that we'll have a very solid domestic contracting season. I'd much rather be in our position than most of other competitors because we're protecting our position. So we look to try to protect all of it, to be honest with you.

And our growth ultimately go to the export market.

Mark Levin -- Seaport Global Securities -- Analyst

No, that's great. That's really good color. Appreciate it. And then with regard to the growth projects that you talked about in the past.

It sounds like with regard to the prep plant capacity addition that that is likely to happen, it sounds like the board meeting is in September. How much of that additional 500,000 tons would hit in 2020? It sounds like there's a 10 to 12-month duration for their project. Should we expect any incremental tons from that project in 2020? Or is that more or less a 2021 event?

Mike Bauersachs -- President and Chief Executive Officer

Yeah. To sort of address the overall growth project that we're talking about right now, Mark. I think on the prep plant, I think that's a project that we view with a high level of confidence that will provide us an uplift in any market. I think as far as your specific question relating to tons, we would expect, if we got started this year, we would probably bump about another 100,000 to 150,000 incremental tons into '20 from where we would be if we didn't do the upgrade.

And as I said, as far as the Jawbone mine, I think right now, per your question to Mike about the market overall, if this year is somewhat similar to last year, I suspect some time certainly by the middle part of this quarter, maybe even probably at that time, late September, we ought to have pretty good visibility on what the domestic situation looks like. And I think as far as putting in a new mine like Jawbone, which is a multiyear project, I think as we sit here in late August, mid-August, we're going to take a fairly pragmatic view. We're certainly going to grow ton. But we're not going to grow tons at the expense of being rather conservative about our approach.

So --

Mark Levin -- Seaport Global Securities -- Analyst

No. That all makes sense. Then my last question just has to do with capex in '20 and going forward. I think Jeremy did a great job mentioning how you guys could drive this down to maintenance capex levels in a sort of more stress-test scenario, which is a very good to hear.

But when you're thinking about 2020, if you just kind of assume the curve sort of stays where it is or in this general range. Is there -- where do you think about how capex in '20 would look relative to 2019 assuming you go forward with the Knox Creek prep plant expansion?

Randy Atkins -- Executive Chairman

Well, the prep plant, just to be clear, Mark, is at Elk Creek.

Mark Levin -- Seaport Global Securities -- Analyst

I'm sorry, Elk Creek. My apologies. Yes, Elk Creek.

Mike Bauersachs -- President and Chief Executive Officer

Jeremy you want to? And [Inaudible] touch on that --

Jeremy Sussman -- Chief Financial Officer

Yeah. So I think I mean we gave you the maintenance capex levels at sort of $6 to $7 per ton. And as Randy noted in his prepared remarks, you'd be looking at about 2.3 million tons next year if we don't get ahead with anything and you just got the numbers of what the plant would allow us to add. Look, I think above and beyond that, we want to get through the board meeting, get through budgeting and whatnot.

But I think those are good numbers to kind of start with. And then once we've got more firm plans on -- we're ready to announce on growth, we'll kind of build through those levels with you guys.

Mark Levin -- Seaport Global Securities -- Analyst

All right. Great. Thanks very much.

Mike Bauersachs -- President and Chief Executive Officer

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Scott Schier with Clarksons. Your line is now open.

Scott Schier -- Clarksons Platou -- Analyst

Good morning, everyone. Congratulations on a record quarter.

Mike Bauersachs -- President and Chief Executive Officer

Thank you, Scott.

Scott Schier -- Clarksons Platou -- Analyst

You mentioned that there are some assets that may become attractive at a certain price point. Can you just walk us through your thinking around your capital allocation priorities going forward? What's your preference between existing development opportunities, asset acquisitions, and returns to shareholders?

Randy Atkins -- Executive Chairman

I'll let Mike go on some of the specifics. Obviously, all of our projects we anticipate being something that will be very accretive to shareholders. So we're not going to pull the trigger on anything that doesn't look like it meets a fairly high level of return. As far as the distinction between sort of organic projects, which are sort of ones that we control versus sort of third-party projects that we would acquire, I think our bias has always been toward organic projects, that they're essentially either within our areas of control of our existing mining complexes or certainly sort of very simple add-on or bolt-on opportunities surrounding those complexes.

And with that said, Mike, maybe you want to add a little more color.

Mike Bauersachs -- President and Chief Executive Officer

Yeah. I think our priorities continue to be probably cost savings type things that could be in the form of acquisitions that could kind of able us to run the mines that we put in better. We continue to have a huge bias on putting our own coal mines in. You could hear it throughout my comments.

We just think we do a really good job putting coal mines in and doing it the right way. And what's been proven to be true is some of the better reserves that are available are greenfields or projects that haven't been active that are in spots sort of in between where existing infrastructure's at. And in the end, geology wins. And so we're going to bet on geology.

And then we'll figure out all the infrastructure stuff later because ultimately, those are the tough projects. But those are the long-lived projects that have advantages. So I guess you could call us a bit of a contrary with how other people could behave because they have a tendency by existing production. We just go the other direction.

So I think the strategy's proven out pretty well at this point.

Jeremy Sussman -- Chief Financial Officer

And I'd also say, Scott, as we move forward and get sort of a more mature book with a little bit larger production, we will be in a position to dedicate, obviously, our free cash flow toward this type of activities as opposed to trying to use it or use our cash flow rather to pay debt or legacy lab. So at least in that gives us a certain leg up.

Mike Bauersachs -- President and Chief Executive Officer

I will also add, I know Randy used some notes on this, we continue to keep dividends on the table. We look at them. We at this point have a great deal of really quick return type capital investments in front of us even at a slightly declining market. And that being said, we're again substantial owners of the shares and we're not against dividends, either.

So --

Scott Schier -- Clarksons Platou -- Analyst

OK. Great. That's very helpful. Thank you for that.

Switching gears a little bit. It's more of a market question. Can you talk a bit more about what you're seeing in the domestic market? Do you expect U.S. pricing to continue to follow the decline in obviously seaborne? Or is it really kind of diverging into two different markets?

Randy Atkins -- Executive Chairman

So I think I'll make the first comment, Scott, before Mike gets into it, which is that we're not going to touch anything relating to pricing in the domestic negotiation. So in terms of trying to give guidance as to whether you think it's up, down or sideways, we're certainly not going to make a comment on that in this discussion.

Mike Bauersachs -- President and Chief Executive Officer

It's really a bad time to talk about it because there's just stuff ongoing, really even as we're standing here. With that being said, we are very close to the marketplace in which we operate. And we see even recent earnings releases with high cash costs, etc. And one would think that a lot of people would not have much of ability to alter their -- to alter what they're willing to sell coal for based on a lot of what we're seeing.

And we've actually physically been in coal mines, and frankly, we wouldn't operate hard landing on them, which I doubt we'll fix them, which should be a tough thing to do.

Randy Atkins -- Executive Chairman

So Scott, I thought it was going to be Lucas who's going to ask this question like he did last year about what of our prices and who are our customers for this coming year, but you jumped the shark.

Scott Schier -- Clarksons Platou -- Analyst

Yeah. I thought we had to switch it up a little bit this year.

Randy Atkins -- Executive Chairman

That's good. That's good.

Scott Schier -- Clarksons Platou -- Analyst

Right. Thank you very much guys and goodluck on the fourth.

Mike Bauersachs -- President and Chief Executive Officer

Thanks, Scott.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Lucas Pipes with B. Riley FBR. Your line is now open.

Matt Key -- B. Riley FBR -- Analyst

Hi, good morning, everyone. This is Matt Key asking a question for Lucas today. Just a quick one for me today since most of my questions have already been asked. But Elk Creeks costs per ton came at the high end of its 2019 guidance range in 2Q.

What exactly drove this? And do you see cash costs improving in the back half of 2019 at Elk Creek? Thank you.

Chris Blanchard -- Chief Operating Officer

This is Chris. So Elk Creek did come in at high end, but it was driven largely by two things, 50% of the increase was based on sales-related increases, which had higher royalties based on higher revenue, and the other 50% was on the cash costs at our Eagle mine, which resolved by the end of the quarter, and have returned to first-quarter levels. So that was geology at Eagle, and basically higher coal prices drove it. We have several things I outlined, where we have some cost savings going forward.

So I think we'll see us pull back into the -- safely into the range as we finish the year.

Jeremy Sussman -- Chief Financial Officer

But we're comfortable with the $63 to $67 range at this point, and we'll leave it at that.

Matt Key -- B. Riley FBR -- Analyst

Got it. Thank you. That's very helpful. And one more, I guess, I'll sneak in here.

Based on your current capex guidance, you have roughly $15 million to $20 million remaining on the 2019 budget. Could you remind me exactly what that capital's being allocated, and if you would expect it to be evenly spread between 3Q and 4Q? Thank you.

Mike Bauersachs -- President and Chief Executive Officer

Go ahead, Jeremy.

Jeremy Sussman -- Chief Financial Officer

All right. So yes, in terms of the second-half capex, most of the growth capital is being allocated to Berwind. As Randy and Chris both talked a bit about in the prepared remarks, there's a little bit of capital being spent at the Elk Creek plant as well, not necessarily the upgrade per se, but just sort of general items, and then your normal maintenance capex. So we're comfortable with where first half capex came in.

And again, you should kind of look to similar levels, as you noted, in the second half, give or take.

Matt Key -- B. Riley FBR -- Analyst

Got it. That's very helpful. Congrats on a record quarter and best of luck moving forward.

Mike Bauersachs -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We have no further questions in the queue at this time. I would now like to turn the call back to Randy Atkins.

Randy Atkins -- Executive Chairman

OK. Thank you very much --

Operator

We did have a question who joined the queue. It looks like it's coming from the line of Mason Stark with Wilshire Phoenix. Your line is now open.

Mason Stark -- Wilshire Phoenix -- Analyst

Hi, gentlemen. Thank you very much. Good morning. Two questions that haven't been addressed on the call.

The first one, I was interested to see the transportation costs came in less than I was expecting this quarter. I was wondering if you could go through, is there a mix? And it's interesting all of a sudden just because you had a slightly -- a bit more shift internationally. So I was wondering to see if there was something going on at the variance between Q2 and Q1.

Mike Bauersachs -- President and Chief Executive Officer

Yeah. I think from our perspective, when we think about transportation there, it's typically a course. We're shipping a majority of our coals domestically, and we don't -- basically, we still have that coal FOB mine. You've seen a pretty large shift from us really focusing in on the domestic business based on the pricing that we receive.

And from a fluctuation and transportation cost standpoint, and things going to the quarter, things that we pay for the freight on, we've actually seen a moderating, slightly moderating cost as the second-quarter advances and into the third quarter, albeit I would definitely say not necessarily a sea change in any sort of activity, and I would just say slightly downward. So I -- as we see where the domestic numbers come out and as we look at the international pricing, and how it advances through the end of the year, I will say, historically, if international pricing remains in the range that it is or slightly lower, we should see a pullback in transportation and or even loading costs to some extent. So that would be just a general comment. But --

Randy Atkins -- Executive Chairman

And I would just remind you, if you're looking at the transportation costs sort of toward the end of the release and the reconciliation of non-GAAP measures, all of our domestic sales are FOB mines, so the transportation is borne by the steel mills. So if we're exporting coal, you'll see it on that front. And given that the large portion of our book is domestic versus export, one extra cargo on the export front here or there in a particular quarter will cause that number to fluctuate.

Mason Stark -- Wilshire Phoenix -- Analyst

Got it. Understood. OK. And then the second question I had was sort of more of an overall market.

As you alluded to with the recent bankruptcy filings of some of your competitors and that you think some of those mines might not be able to come back into operation. If you had to give a ballpark, what kind of potential impact do you think you could see in terms of a decline in the overall supply in the marketplace going forward if you're right?

Mike Bauersachs -- President and Chief Executive Officer

Yeah. I think as we sort of sit here and look at production, I mean, I think there's a very good chance that there could be 1 million or 2 million tons that basically go off the radar. And when you look at how tight the things are, and then you look at the spectrum of really high-quality coals, I think that probably a few of them are in those higher-cost coal mines. And so 1 million or 2 million tons coming off the market could have a big impact on pricing and availability of the best quality coals.

Jeremy Sussman -- Chief Financial Officer

And the other thing I would add is just the recent -- with the recent decline in pricing, there's been a lot of growth projects that have been pondered. And you just sort of wonder out loud, are some of these companies going to put $0.5 billion in for a new mine in this environment? And we don't know the answer right now. But certainly, I think the decline in price would cause a number of folks to think about pulling back, at least on some of the bigger projects. So I'd view that as a positive as well.

Mason Stark -- Wilshire Phoenix -- Analyst

Gotcha. Thanks. All right. Thank you very much, and goodluck in the second half this year.

Mike Bauersachs -- President and Chief Executive Officer

Thanks, Mason.

Jeremy Sussman -- Chief Financial Officer

Thank you.

Randy Atkins -- Executive Chairman

OK. If there's no further questions, once again, we appreciate everybody being on the line, and we'll look forward to catching up with everybody. I guess, it would be in November. So thanks again, and have a good day.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Jeremy Sussman -- Chief Financial Officer

Randy Atkins -- Executive Chairman

Mike Bauersachs -- President and Chief Executive Officer

Chris Blanchard -- Chief Operating Officer

Mark Levin -- Seaport Global Securities -- Analyst

Scott Schier -- Clarksons Platou -- Analyst

Matt Key -- B. Riley FBR -- Analyst

Mason Stark -- Wilshire Phoenix -- Analyst

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